In a miraculous recovery from Tuesday's drop the Dow managed to rebound to a new closing high for 2005. The Nasdaq remains the anchor for the rebounding markets with a gain to 2065 but much less exciting than the Dow and S&P rebound. It may not be dragging much longer after rebounding +40 points from the Wednesday low. This attracted some buyers and triggered some buy programs as it moved slowly higher. Is the tech divergence about over? Will it succeed in overcoming the very strong resistance at 2100? Next week may hold the answer for tech traders.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday started out well with an upward revision to the Q4-GDP to +3.8% growth from its originally reported +3.1%. This may be old data but the upward revision back to near the 4% range relieved a lot of concern about the economy. When the initial +3.1% number was announced it was a shock to many given the Fed's insistence that the economy was improving. Friday's revision was driven by a sharp jump in exports as well as business investment. Consumer spending was revised downward but was not a material factor. The initially reported -3.9% decline in exports was revised to a +2.4% gain which caused the sharp jump in the headline number. Business investment was also revised higher from +14.9% to +18%. These revisions suggest that the economy is indeed gaining strength despite the series of inconclusive reports we see each week.

Existing Home Sales dropped only slightly for January to an annualized rate of 6.8 million units from 6.81 million in December. However, the inventory of homes for sale continues to shrink. In November there were 4.4 months of supply on the market but that has fallen to a record low of only 3.7 months at the end of January and we are heading into the buying season. The talk about a housing bubble continues but demand continues to increase. According to the Brookings Institute and a survey they did last year the demand for housing in the U.S. will require 60 million new homes to be built before 2030. That will require nearly 2.5 million homes to be built each year and this is above the current pace of 2.16 million as reported in the January New Home Sales numbers last week. The drop to the record low of only 3.7 months of supply sent homebuilder stocks soaring once again. RYL gained +2.55, PHM +5.17, TOL +2.39 on top of an already strong week, BZH +5.78 and NVR +5.45. With inventory and demand numbers this strong and builders trading in the 8-12 PE range there appears to be plenty of room to grow.

Like builders the oil sector exploded higher once again after Prudential upgraded Exxon saying it could have another +15% upside despite its recent breakout to new highs. All the major oil indexes also moved to new highs on the upgrade and oil prices continue to hold just under the $52 level. We have not seen a pullback from last week's expiration induced spike and we are seeing a continued pickup in demand despite normal trends for softening in March. Cold weather is depleting heating oil supplies and refineries are hesitant to produce more this late in the cycle. Refiners are also seeing new highs with Valero tacking on +4 after Carl Icahn said he was investing $1 billion in the oil sector and Kerr Mcgee in particular. With billionaires willing to invest billions at these levels it suggests there is plenty of upside still available. Boone Pickens restated his $60 before $40 claim and the smile on his face at $52 is widening. I am joining Pickens on the prediction platform with a $100 before 2010 prediction. That should send gas to about $5 a gallon. Have you ordered your hybrid vehicle yet? I am going to an Oil Crisis seminar n Denver on Monday. It should be interesting to see if their views differ from mine.

The markets rebounded off their Tuesday lows with the help of continued market inflows. I suspect the mutual funds did their best to paint the tape as we head into month end in an effort to attract more money. TrimTabs reported again today that $2.2B flowed into funds for the week ended on Thursday. That brings the totals for the year to inflows of +$2.8 billion into international funds and outflows of -$6 billion from domestic funds. That gap is closing on the domestic side after three weeks of positive flows but we are nearly two months into 2005 and still negative for the year. Piper Jaffray reported on Friday that 85% of the inflows for the year were into international funds with the last four weeks the strongest inflows since March 1994. In 2004 TrimTabs reported a total of $16 billion flowed into international funds and $35 billion into domestic funds. Given these numbers it should come as no surprise that the majority of market gains over the last three days has come on the backs of dozens of buy programs. Funds are pouring what money they have into the market as we approach the month end in an effort to attract more contributions. Money flows follow performance and so far they have been successful in pushing the Dow and S&P to new closing highs for the year just in time for the weekend/month end newspapers to make the proclamation. To say mutual funds were fishing for cash would be an understatement. If they paint the picture correctly the money will flow and it appears they produced a Rembrandt this week.

XLE Chart - Daily

CRB Index Chart - Weekly

Oil is not the only commodity on fire and the CRB commodity index rose to close over 300 on Friday and a 24-year high. This is a +7% gain from the early month lows and a strong breakout of its four-month congestion range. Commodities soared from the 2003 low of 228 to 285 in early 2004. They languished at those high levels for all of 2004 as they consolidated the gains with a solid top at 290 in Q4. The talk about China slowing its growth rate kept them in check but recent reports suggest not only that China has not slowed but other countries are picking up speed as well. Commodities are normally late cycle bloomers and this also suggests the U.S. economy may be gaining strength. Commodities are purely demand driven and breakout to a new 24 year high suggests demand is very strong.

The markets rebounded out of Tuesday's drop with the indexes posting their best three-day performance since November. Leading the charge was the Dow where those commodity stocks like DD and AA led the charge along with XOM, now the largest company in the world by market cap. CAT, BA and UTX played strong supporting roles. The Dow closed at a new high for 2005 as well as the S&P. Unfortunately the Nasdaq at 2064 remains the weakest link and is still well below its 2005 highs at 2191. The big techs, MSFT, CSCO, DELL and Internets EBAY, GOOG, YHOO and AMZN remain very soft and in some cases at critical support.

SOX Chart - 60 min

SOX Chart - Weekly

The Nasdaq did manage to post three days of gains but it was almost entirely on the back of the SOX. The SOX rebounded off its 420 lows on Wednesday and rallied back to 443 and critical resistance in just three days. This was a very strong performance and sets up a retest of very strong resistance at 450. A break over 450 would produce some strong short covering and could give the Nasdaq new life. With Intel the only big tech showing a pulse and facing its mid-quarter update on March 10th it is questionable how much farther it and the SOX will run. The SOX also came to a dead stop right at the 200-week average, which has been solid resistance all year. I believe the trading bounce the Nasdaq is currently seeing was propped up entirely by the move in the chips. If fund managers were going to paint the tape with a small amount of cash the chips would be the way to do it. Most have relatively small market caps compared to the giants of the Nasdaq like CSCO, MSFT, EBAY, GOOG, etc. Throwing $2B cash at those giants would hardly generate a bounce. Using the same cash spread around the chip sector could generate a sizable move with less risk given the broker upgrades over the last two weeks. I may be imagining things but I suspect this scenario may be closer to the truth than we think. They are hoping that by using their small amount of cash and some chip stocks for month end kindling they can attract some additional contributions leading to a bigger fire under a Nasdaq.

For next week the Dow is faced with having to fight the 10850 resistance once again. This has been strong resistance since late December and it is not going down without a fight. We now have nearly a +235 point Dow gain over the last three days and if the tape-painting scenario is correct those funds may be running out of cash. Pushing it higher on Monday will do them no good. They had to produce the gains before the weekend newspapers to attract the cash. This could have left them winded after the sprint into Friday's close and breaking that 10850 resistance without a pause could be a challenge. The S&P is also going to be fighting that 1215-1217 resistance that has always held before.

We are facing some major economic reports next week with the PMI, NAPM and Personal Income on Monday, ISM on Tuesday and several employment reports culminating with the non-farm payrolls on Friday. These reports could confirm the Fed's economic viewpoint or turn into a wall of worry the bulls will have to scale. Either way I have a hard time seeing the Dow and S&P breakout without some more excitement from the Nasdaq. So far our trading bounce from 2023 is looking good but I continue to believe that 2100 is going to be a major hurdle. If we do move higher next week I would look to take profits on the bounce at 2080 and target 2090 for another trading short. If the Dow and S&P do make a break higher and the Nasdaq breaks 2010 I would switch to aggressively long because I think that breakout would drag a lot of cash back into the game. Until that happens we continue to trade the range using the Nasdaq as the weakest link.

New Plays

Most Recent Plays

by OI Staff

New Plays

Long Plays

Short Plays

FAF

None

New Long Plays

First American - FAF - close: 36.63 chg: +0.85 stop: 35.29

Company Description:First American Title Insurance Company, the largest subsidiary of The First American Corporation, traces its history to 1889. One of the largest title insurers in the nation, the company offers title services through nearly 1,500 offices and an extensive network of agents throughout the United States and abroad. The company has its headquarters in Santa Ana, Calif. (source: company press release)

Why We Like It:FAF may be an insurance stock but it's certainly marching to the beat of its own drum. The IUX insurance index has been somewhat volatile the last few weeks with a big rally and subsequent pull back. Shares of FAF ignored most of it and continued steadily climbing higher. If you look at the daily chart you'll see that traders have been buying dips to the simple 50-dma for months. These proved to be attractive entry points before a strong surge higher in the stock price. While there is certainly no guarantee that FAF will do it again the recent bounce from the 50-dma looks like another bullish entry point. Considering the stock's relative strength over the last several months we'll take our chances. Short-term technicals like the RSI and stochastics are turning higher. We want to go long at current levels and target a move to the $39.75-40.00 range. We'll use a stop loss at $35.29 just under the Thursday low.

Play Updates

Updates On Latest Picks

by OI Staff

Long Play Updates

Arkansas Best - ABFS - close: 41.40 chg: +0.76 stop: 40.75

A three-day rally in the Industrials and a bullish breakout in the Dow Transportation index has given new life to shares of ABFS. At least that is how it looks with the bounce from support near $39 at the bottom of its trading range. The Premier Investor newsletter is still sitting on the sidelines waiting for ABFS to hit our trigger. We're waiting for the stock to breakout through the top of its trading range and technical resistance at the 50-dma. Our entry point to go long is at $42.51. Until ABFS can trade there we'll sit out.

After five days of churning sideways and consolidating its gains from the previous week AGYS looks ready for another leg higher. We added the stock several days ago on the bullish breakout over heavy resistance at the $18.00 mark, which produced a triple-top breakout buy signal on its P&F chart. This Friday's move over the $19.00, which was resistance all week, looks like a new bullish entry point. Keep in mind that our target is the $20-21 region. We are going to raise our stop loss to $17.49.

On your mark! Get set. BHE has rebounded from the $31 level and broken out over technical resistance at the 50-dma. Shares are currently still under resistance at $33.00 but we're expecting a move higher. The play is currently unopened as we wait for BHE to hit our trigger to go long at $33.51. Given the bullish technical oscillators that could happen soon. More aggressive players may want to consider jumping the gun and going long on a move over $33.20.

Hold on to your horses but it looks like the SOX semiconductor index has finally broken out over major resistance at its 200-weekly moving average. This average has been resistance for many months. A breakout here for the sector could spark some heavy short covering. Meanwhile BRCM is on the rebound as well. The stock added 3.78 percent on Friday after bouncing from its simple 100-dma, which was support in January. It doesn't hurt that the company recently announced a $250 million share buyback program. We currently have a trigger to go long at $34.55, which would surpass the early December highs. Until BRCM trades at our trigger or above we'll sit on the sidelines.

Crude oil has surpassed the $50.00 a barrel mark and oil stocks have continued to hit new highs. On Friday the group got a boost when Prudential came out with positive comments for the sector. Shares of TSO are finally participating in the rally and have confidently broken out over resistance at the $35.00 level. Now maybe TSO can do a little catch up to bring its own gains in line with those of its peers. Our target remains the $39.50-40.00 region. Readers may want to watch for a dip back toward the $35.00-35.50 area as a potential entry point.

The breakout in VCI continues. On Tuesday VCI reported earnings and the stock broke through major, long-term resistance dating back to September of 1999. The rally has continued ever since. The stock got another boost when one analyst firm slapped an "out perform" on the stock following its earnings and breakout. We remain bullish and our target is the $40.00 region but traders might want to look for a pull back into the $36.00-36.50 region as a new entry point. We are raising our stop loss to $34.75.

It was a close call there earlier in the week but WAT held above technical support at its rising 50-dma and the $48.00 level. The bounce from support has produced a new bullish entry point although it may be prudent to wait for WAT to clear the $50.00 mark before initiating positions.

The stocks in the steel industry continue to climb and seeing the commodities index hit a new 24-year high on Friday certainly suggest the economy is picking up. After a few days of consolidating under the $40.00 level WPSC broke out with a five-percent rally on Friday. The stock actually closed at a new all-time high above its late December peak. This is good news and should alleviate fears of a potential double-top. It may be worth noting that the P&F chart, with its buy signal, has seen the project price target rise from $51 to $57. Short-term players may want to consider exiting now for a profit. We're going to hold out for a move into the $44-45 region. Don't forget that we plan to exit before WPSC's mid-March earnings report.

When the market is in rally mode, like it is now, the best we can hope for from our short plays is under performance. Fortunately, that's exactly what we're getting from shares of BUD. The stock has completely ignored the Dow's 200+ gain in the last three days and shares continue to look vulnerable. Just remember we're still looking at another six to eight weeks to hit our target of $43-44.

The same can be said for CSCO. The tech bellwether has ignored the two-day bounce in the NASDAQ, which is exactly what we would want to see from a short/bearish candidate. We would still consider new positions here but if you're looking for alternative consider a breakdown under $17.00 or a failed rally under $18.00. There is no change with its P&F chart and its quadruple-bottom breakdown sell signal and $14.50 target. Our target remains at the $15.00 level.

It may look like IACI is trying to bounce but the stock is definitely under performing the rest of the market. We remain bearish on the stock but readers may want to watch for a failed rally near the $23.00 level, which should be resistance. If you prefer to play a momentum-based entry look for IACI to produce a new relative low under $21.70.

So far so good. With the Industrials up three days in a row we have to be happy with NYT choosing not to participate in the rally. Instead the stock looks vulnerable to more selling. Readers can choose to enter new plays at current levels or wait for a new relative low. Just remember to be careful about entering bearish positions if the Dow and S&P 500 breakout over their December highs.

Target achieved! Actually DOW has surpassed our target at the $56.00 level. Another day of strength in the broader indices helped fuel DOW to another new all-time high. If you haven't exited yet be careful and consider using a tight stop loss. DOW, while looking very strong, still looks over extended and due for another dip potentially to its simple 10-dma. We are closing the play at $56.00.

Watch List

by OI Staff

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Today's Newsletter Notes: Market Wrap by Jim Brown, and all other plays and content by the Option Investor staff.

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